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Insight About Outsourcing

Converting from a proprietary work force to a contract security team can provide immediate and significant savings. However, it is not always the right way to address problems with the security operation, and a company must first make sure that it understands what the goal of the program is and how changing to a contract force will further that objective. Moreover, if not properly managed, the switch from in-house to contract guards can upset the corporate culture and result in an unsettled work force. To avoid mistakes, security managers must evaluate the company’s specific needs, calculate costs correctly, assess the marketplace and vendor qualifications, set clear standards in the RFP and service contract, and monitor performance. 

Company needs. The first consideration is the objective. If, for example, the company is not satisfied with the performance of the in-house guard force, the solution may not be outsourcing. The security manager must first make sure that the root cause of the problem is understood.

This issue was illustrated several years ago in an urban environment in California where a particular site was experiencing violent gang activity. The in-house security work force had become intimidated by the gang activity.

Just switching to contract officers would not have addressed the root cause. Prospective security officer vendors were asked to explain how they would address the situation. One vendor had many clients in that urban community and was able to solve the problem by contacting local law enforcement as well as community and juvenile-relations experts. Various meetings were held at the local schools. The end result included the building of an outdoor basketball court at a state-funded youth center with night lighting. This quid pro quo arrangement with local youth almost single-handedly quelled the problem and permitted the center to view its security work-force needs from an operational quality and economic perspective.

Cost analysis. A cost analysis must also be conducted before management decides whether to switch to a contract guard force. When going through this analysis, the manager must be sure to include the nonobvious costs of the change.

Security should begin with the cost of wages and benefits. This is straightforward, because it can be calculated from existing payroll records. Other payroll-related costs involve overtime, shift differentials, bonuses, and associated benefits. These, in turn, may include authorized leave such as vacation and sick pay, pension programs and profit sharing, personnel insurance such as medical and workers’ compensation, vehicle allowances, and payroll taxes.

Once payroll-related costs have been identified, the cost analysis should reflect the cost of supervision and management. While those costs will be lower with outsourcing, the company will still have to oversee the contract force and liaise with the contract supervisors if the program is to succeed. This item is often overlooked as an associated overhead expense.

Similarly, there are other indirect expenses, such as internal charges for auditing, payroll administration, human resources, legal support, and facilities management that are applicable to an in-house force. Some of these costs, such as legal, are sometimes overlooked.

For example, an in-house security officer employed by a hotel/casino operation in New Jersey became involved in an altercation in which the officer used excessive force. The resulting lawsuit, substantial defense costs, and time spent away from work by various supervisors in court had not been an anticipated cost of the security operations budget.

While the company might still have been named as a party to the lawsuit even if contract officers had been involved, it would have been more likely to have been absolved of liability and to have some or all of the legal costs borne by the contract provider.

Other charges to be factored into the overall cost of an in-house guard force include training, professional organization participation, uniforms, miscellaneous equipment, supplies, and occupancy. Then in going out for bid on a contract provider, the company will want to assess the same costs. In some cases, the company may still share in them. For example, the company may agree to offer some training specific to the facility. And it will still need to provide space for officers.

The cost analysis should use a standard formula for determining current costs of a proprietary force. This formula is the average wage of the work force, plus the average benefits paid to that work force, plus the average salary-related taxes, plus direct operating expenses, plus any indirect charges—such as uniform costs—multiplied by the number of proprietary security employees. The resulting number is referred to as the total operating cost (TOC).

Another figure that will prove very helpful is the hiring organization’s fully loaded cost (FLC).  This is determined by dividing the TOC by the average annual work year, or 2080 hours. This number is then divided by the total number of security officers. For example, if the total staff equaled 50 and the TOC was $1.5 million, the FLC would be $1.5 million divided by 2080, or $721.15, divided by 50, or $14.42 per hour. The FLC can then be used as a quick comparison against any proposed billing rate offered by a potential contractor.

One final calculation is required, however. This is the projected staffing cost that will be required of the contractor. A typical employee is away from the job for an average of 22 days per year. This time off, referred to as call-offs, is the result of authorized leaves such as vacation and holidays, sickness, and anticipated leaves such as inclement weather, family deaths, and lack of transportation. If the company has a proprietary force, it will have to pay some officers overtime to cover posts when other officers are unexpectedly out.

A conventional supplier relationship assumes that all call-offs are covered at a straight-time rate. A conversion could reduce operating costs by an average of 8 percent. For a staff of 50, this means a reduction of 4 full-time workers. Using the FLC of $14.42 per hour, the result is a net reduction of nearly $120,000 annually.

Although some savings, as from the avoidance of overtime, are real, managers must be careful not to accept all vendor claims at face value when reviewing bid proposals. It is important in that regard to investigate and confirm all claims. Moreover, companies should not assume that the lowest bid will be the least costly over the long-term. In fact, problems stemming from low bids may be why so many organizations are disenchanted with contract service.

Market/provider assessment. Assuming that outsourcing makes sense for the company, the ability of the local market to support the change must be assessed. Even in the largest markets, there is no assurance that there are contract sup­pliers capable of meeting an organization’s particular needs. The more relevant question to ask is which organization would best be able to recruit, screen, train, and equip qualified candidates.

The object of a market analysis is to determine which companies can ensure quality management and supervision of the account. While cost remains a central factor, security decision-makers need to demonstrate to both their own satisfaction and to senior management that the outside resource can meet expectations.

Some markets are notoriously problematic in terms of competitive wages and turnover, and any conversion process must carefully review how the contractor intends to fulfill staffing (in accordance with selection and screening guidelines).

For example, a regional mall in Maryland was experiencing high officer turnover after 9-11 due to an extremely competitive environment for security personnel. Nearby, in Washington, D.C., companies were paying unusually high hourly rates for qualified officers.

The regional mall went to great lengths to ensure that its RFP established a competitive hourly wage at which an officer would start, and it spelled out the raise the officer would receive after a 90-day probationary period as well as after one year. These hourly wages were benchmarked with the region. In addition to establishing wages, the mall also analyzed working conditions at its sites to improve the attractiveness of the job.

The company’s goal was to reduce the turnover rate 30 percent—an ambitious one given the industry’s notoriously high turnover rates. The approach succeeded, and the actual turnover was brought down to 10 percent after one year.

Criteria to be followed when evaluating contract services include, as mentioned earlier, their ability to recruit, screen, train, and equip qualified officers. One indication of quality service is how long they have been established in the market area. The track record and reputation of the potential contractor should also be assessed. The security director should investigate any pending civil action, judgments, or criminal actions.

Also important is how many qualified officers are available in the company’s market. There should be at least five times the necessary staff at the branch that will serve the company to ensure that the facility’s needs are met and perhaps more important, the officers should have experience in the same industry.

The company should also make sure to consider the special staffing needs it might have in an emergency per its contingency plans. It should ensure that the contractor can meet those demands as well.

On the financial side, insurance coverage and branch turnover rates can indicate the health of the contract company. For example, in its zeal to obtain new contracts, a contract security officer company in Texas was signing agreements that it had not verified with its own insurance underwriter. That created potential liability for the client should an officer harm someone on the premises of the client. The client failed to understand the underwriting implications of a service company accepting work outside the limits of its insurance coverage.

An insurance certificate identifying the level of coverage would have revealed that the contract provider would not have been covered had an incident occurred outside of the scope of coverage, possibly causing the injured party to go after the client for damages. Thus, before hiring contract officers, the company should make sure that the provider has the requisite insurance and that the client company is named as an additional insured party under that policy.

Client companies should also request documentation of the training program that contract officers have gone through, and they should consider how the laws and skill sets taught relate to the locality and to what the company will need the officers to do on the job.

For example, shoplifting-related laws, such as merchants privilege, vary by state, and officers must be trained in the correct protocols for the jurisdiction. In one case, a security officer in Camden, New Jersey, was assigned to a retail store in Pennsylvania. His short ride over the Delaware River made a distinct change in how he should respond to a potential shop­lifter. The failure to train the officer in Pennsylvania law eventually led to a civil suit for wrongful detention.

RFP and service contract. The request for proposal (RFP) sets the stage for everything that will follow. While the specifics of an RFP are outside the scope of this article, the document must articulate the agreement between the company and the contract security provider. The RFP is a precursor of the service contract and sets out each procedural item the contract company must provide.

The service contract is where the client and winning bidder draw up the explicit terms of the arrangement. In addition to prices, training and other issues should be included in the service contract as should any agreements about special services that will be provided to support strategic management of contract personnel. Another issue that must be covered is loss prevention, such as how officers will be expected to handle loss reporting and incident tracking, incident analysis, and operation of special scheduling software.

The service contract would not deal with specific job scheduling such as what posts would be staffed and by whom. These details would be worked out later by the contract company.

Incentives. Another key to ensuring quality performance is to put into the service contract some incentives or penalties. For example, preferred pro­vider status for good service or a clause that triggers renegotiation of the contract after problems could help the contract company work harder to meet its goals.

Personnel management should also be part of the package. The service-agreement contract should require the provider to replace poorly performing officers.

Performance monitoring. After completion of the contract negotiations, the in-house manager cannot simply expect the program to run on automatic pilot. He or she must have a set of criteria that the supplier and the client have agreed will be met, and these strategic objectives must be monitored. The strategic objectives to be monitored by the organization might include the turnover ratio, the rate of incidents, quality control, employee awareness, and the leadership of the contract force.

Turnover ratio. Turnover should be monitored on a quarterly basis. The security director should, as noted earlier, pay a competitive wage. It is also advisable to implement incentives for the contract company to achieve low turnover. Security officer employment must no longer be a stepping stone to a better job or a part-time benefit to retirees or the unemployed. If it is, high turnover and poor performance will continue to be a problem.

Incidents. Patrol size and location coverage must be continually evaluated to identify how, when, and where resources should be directed to mitigate the occurrence of security incidents. To further address this issue, security should schedule meetings between the contract service and senior management to review incident history and to adjust the security plan as required.

Quality control. The quality control of preservice and in-service training as well as professional development should also be monitored. The client organization must have input into these curricula. Training has a significant impact on security staff performance and turnover. Staff members who feel that they belong to a profession that is dependent on a body of knowledge will have the pride and motivation to perform well.

Awareness. Security professionals should not allow the contract security officers to carry the entire burden. Part of a successful program includes carefully constructed security awareness programs for existing and new nonsecurity staff so that they are part of the security solution. The leadership of this effort should come from the contract service.

Leadership. Contract service provid­ers should be included in management meetings. In some cases, contract security should lead the program presentations. Contract officers should also be included in liaison meetings with local law enforcement. The contract service should be encouraged to lead in this objective.

There should be no noticeable difference between the quality of a proprietary force and that of a contract security officer service. When problems do arise, it is often because the organization contracting for security officer services has not maintained a day-to-day stewardship of the quality of the service. This routine supervision is mandatory.

Security must set objectives, evaluate statistics, stick to operational guidelines, establish incentives, keep communications flowing, and expect to pay for quality service. Companies that follow that strategy will have reliable and sustainable security officer programs.

Ira S. Somerson, CPP, is the owner of Loss Management Consultants, Inc., in Blue Bell, Pennsylvania. He is a member of ASIS International.